How will India’s economy be impacted by the establishment of the Trans-Pacific Partnership (TPP)?

The Trans Pacific Partnership or TPP is a trade agreement between the US, Japan and ten other nations on the Pacific Rim including Australia, Singapore and Malaysia. It can be a threat has emerging from the Pacific theatre.

The TPP agreement covers 30 different chapters addressing issues like non-tariff barriers (NTBs), labour, environment, investment, state-owned enterprises (SOEs) and regulatory coherence which have not been adequately tackled in the WTO.

There are provisions that will affect India

First, with import tariffs in developed countries having reduced to 4 per cent or less, tariffs are no longer as important. NTBs have become increasingly important determinants of trade flows. The TPP attempts to reduce or eliminate NTBs and lay down procedures for Mutual Recognition Agreements (MRAs) of standards and Conformity Assessment Bodies (CABs). This will go a long way towards reducing NTBs among partners, enhancing the competitiveness of their producers.

Second, barring a few exceptions, almost all products will be importable from other partners at zero duty. TPP non-members would face tariff barriers, thereby affecting their competitiveness.

Third, with the establishment of the ASEAN Economic Community in 2015, Cambodia, Laos and Myanmar, all LDCs, will also likely become part of TPP. Thus TPP will have several lower cost producers than India. Fourth, due to the emphasis on regulatory coherence and harmonizing “behind the border measures”, the transaction cost of doing business among enterprises in partner countries would get reduced substantially. This would lead to greater geographical clustering of industries, even if they are in different countries, signaling closer integration with global value chains. Fifth, given the cost advantages of being part of TPP, there would be trade diversion from non-partners to partner countries. Since trade and investment flows are interlinked, it would mean investment diversion too.

What can India do to overcome these disadvantages?

Joining the TPP is not an option in the short run as we still need time to carry out a number of reforms to fulfil the tough commitments required. Closer integration with the Asian region through an ambitious and early outcome in the Regional Cooperation and Economic Partnership (RCEP) agreement negotiations and conclusion of FTAs with the EU, Australia and Canada could mitigate part of the problem.

Simultaneously, start focussing on

1. accelerating the development of a few niche areas of manufacturing and services where India has comparative advantage;

2. emphasize skill development and improve productivity in these sectors to be globally competitive;

3. Improve the ease of doing business and reduce transaction costs, both at and behind the border, to attract FDI and technology and integrate more easily with the global value chain;

4. improve and align our standards with those in the major markets and strongly push for MRAs on standards and CABs with counterparts. The silver lining is that some of our recent initiatives such as Make in India, Skill India and Start-Up India are geared toward bridging these critical gaps in our economy.